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Transferring retirement savings from a 401(k) or similar tax-deferred account to a Roth IRA can help you avoid making taxable withdrawals when you reach your mid-70s. This may reduce your tax burden after retirement, but it won’t save on taxes overall. This is because any funds converted to a Roth are treated as ordinary income at your current rate, resulting in a higher tax bill on your next return.
If you expect to be in a higher tax bracket after you retire and reach the mandatory withdrawal age, if you don’t need RMDs, if you want to preserve wealth for your heirs, or in other circumstances, switching may still make sense. But the most effective rollover strategy may not be based on changing a percentage of your 401(k) collection each year. Instead, it may be better to calculate the conversion rate based on the impact on your tax bracket.
A financial advisor can help you evaluate the pros and cons of a Roth conversion strategy. Use it This is a free tool To match today.
If you are now 58 and leaving your retirement savings in 401(k)You have to start taking it Required Minimum Distributions (RMDs) Predetermined amount every year from age 75. These funds are considered taxable income, and as a result, the tax bill reduces your income to pay living expenses in retirement.
can you Changing currencies Transfer tax-free to tax-free from a 401(k), IRA or tax-deferred retirement savings account to a Roth IRA. Once in a Roth account, the funds are not subject to RMD rules, so you don’t have to worry about spending money you don’t need for living expenses.
If you need your retirement savings, you can withdraw from Roth accounts without paying any taxes or penalties. The only limitation here is that you have to do it Wait at least five years If you make the change before you reach the age of 59.5 before you withdraw money after the change.
Roth conversions cost money, because the converted amounts are treated as ordinary income on your current tax return. A large 401(k) rollover, therefore, can lead to a large tax bill in the short term. With this in mind, many people who do rollovers choose to do so gradually, rolling out a portion of their 401(k) over several years to spread the tax payments and keep your money out of a higher tax bracket. Rates.
The decision to convert a 401(k) to a Roth and how much to convert depends on many interrelated factors, including your current income and expected taxable income after retirement. It’s worth noting that Roth withdrawals are not taken into account when determining income levels that affect Social Security benefits and Medicare premiums.
Remember, a Financial advisor It can help you determine and implement the appropriate strategy based on your circumstances.
If you’re a relatively high earner with $100,000 in taxable income, you’re probably in the 22%. The marginal income tax bracket And he owes $13,841 in federal income tax on his 2024 return. Converting 10% of your $1.7-million 401(k) would add $170,000 to your current income. As a single filer, the $270,000 in earned income would lift you into the 35% bracket and result in a federal tax bill of approximately $59,754 for that year.
If you instead stick to the strategy of shifting just enough to move you into the next higher bracket, you could shift $91,950. This puts you in the 24% bracket and the current tax bill is $35,606.
None of these gradual rollover strategies will completely empty your 401(k) in 17 years when you turn 75 and are subject to RMDs. So you still have to take some taxable mandatory payments, or you may have to bite the bullet and take higher tax rates to convert the entire 401(k) in time. Finally, there are many variables at play with your income and taxes over time. But if you have trouble predicting income tax rates and your own income in the future, it may make sense to have money in a 401(k) and Roth to provide flexibility.
Think about it Talk to a financial advisor To further explore a Roth conversion based on your circumstances and goals.
Converting money from a 401(k) to a Roth IRA can help you avoid RMDs and future taxes. However, the conversion will cost you today in the form of added income tax. You may still want to convert, especially if you think you’ll be in a higher tax bracket after retirement. However, a conversion strategy based on shifting enough money to lift your income out of your current or next highest tax bracket makes more sense than thinking about shifting a certain percentage each year.
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Keep an emergency fund handy in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t exposed to high volatility, like the stock market. The trade-off is because the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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